Google expected to expand San Francisco space

Google (GOOG) has agreed to expand its San Francisco office space at Morgan Stanley's Hills Plaza building in what would be the city's biggest lease transaction of 2013, according to a person with direct knowledge of the deal.

The planned 10-year lease for 350,000 square feet will increase Google's space at the waterfront location by 25 percent, said the person, who asked not to be named because the process is private. The Mountain View-based company will pay average rent of $65 a square foot, little changed from the rate in its current agreement, which expires in 2015, the person said.

Google had been one of the largest tenants in the market for new property including Tishman Speyer Properties, Boston Propertie and Shorenstein Properties, which are building towers without lease commitments.

Google was close to signing a letter of intent to occupy Tishman Speyer's Foundry Square III, under way in the South of Market area, before backing out of the deal, three people with knowledge with the situation said. The 10-story building with 278,000 square feet of luxury offices is set to open this year.

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Rick Matthews, a spokesman for Tishman Speyer, and Google's Jabbari declined to comment on the technology company's involvement with Foundry Square III. The New York-based developer is negotiating with several potential tenants, Matthews said.